‘Paperless Age?’ Not Quite!
If I had a dollar for every time a client has asked: “How long do I have to keep all of this paper?” it would be like hitting the lottery. Even in this “paperless” age, records retention is a sore topic for businesses and individuals alike.
In Publication 583, the IRS offers some guidance: “You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code.” While the words sound ominous, they simply mean that you must keep all records that support an income or deduction item on your return until the period of limitations for that return runs out.
It’s important to know that if you don’t file a required return, the period in question for review by the IRS is unlimited. The unlimited review period also applies to a fraudulent return.
The risk? You could endure your worst nightmare: Having the IRS pore through your records all the way back to the first year of your business. Thus, it’s vital that you file your returns when due (including extension dates). This ensures that you set the statute of limitations at a fixed date.
Generally, the period of limitation is three years. If you file a claim for credit or refund after filing your return, the period is either three years or two years after the tax was paid, whichever is later.
Does the statute of limitations matter? You bet. If you have a credit or refund coming, you can only claim it if you filed in a timely manner. Likewise, the IRS can’t assess additional taxes after the limitations period has passed.
Other considerations to keep in mind include:
- If you file early, the statute of limitations period doesnt begin – or end – any earlier. No matter how early you file, it begins as if you filed on the due date.
- If you file a claim for a loss from worthless securities or a bad debt deduction, the period is seven years.
- If you have employees, the employment tax period is at least four years after the date the tax is due or is paid, whichever is later. You should note that some insurance carriers and pension administrators require that you keep your employment records even longer than the IRS requires. Be sure to check their record-retention requirements as well.
Retention requirements for assets are different. Those records should be kept until the period of limitations expires for the year in which you dispose of the property in a taxable transaction. You also will need those records to compute any gain or loss when you sell or dispose of that property. This is especially true if you have property that was part of a nontaxable exchange.
These are the basic IRS record-retention requirements. In addition, your creditors, insurance company or other government agencies may require that you keep your records for even longer periods of time. This is particularly true if you undertake government contract work.
It’s always wise to check the requirements. And don’t forget to check the limitation periods for your state. Their periods often vary from the federal requirements.
This article is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document, we encourage you to contact the author or an independent tax advisor to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this article may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this article is not intended to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code..